Medical device tax drawing protests

By Beth BrownStaff Writer

Updated 8:06 pm, Monday, March 4, 2013

While some of the most controversial components of the Affordable Care Act don't kick in until 2014, the new year marked the beginning of a tax on medical devices that is sending waves through the industry.

The federal government is levying a 2.3 percent tax on the sale of medical devices, which can be anything from bedpans to heart valves to knee-replacement implants. The tax is expected to raise almost $30 billion over the next decade — in January alone, the tax brought in almost $100 million — but manufacturers and experts fear it will stunt the innovation of new devices and force others out of business entirely.

Most of the companies are passing along at least some of the rising cost to customers. Some also are trimming jobs to cut expenses.

In a January 2013 report, the consulting firm Emergo Group surveyed 3,509 medical-device executives around the world and found that nearly 42 percent said they would pass along some or all of the increased cost to consumers. Another 36.1 percent declined to disclose their plans.

The ramifications might be felt for years. Many manufacturers have contracts which lock in rates with purchasing groups and hospitals, so an increase in pricing could hit years down the road.

The tax comes as particularly bad news for the small medical-device makers in the San Antonio area that still are trying to establish themselves.

Joe Moffett, president of San Antonio's E02 Concepts, said the young wound-treatment company wasn't yet making money before the tax started, and that instead of hiring new employees, he'll be sending a check to Washington.

Moffett said large manufacturers, like Johnson & Johnson and General Electric, can afford to pass additional costs to consumers or lay people off when profits shrink. But that is not an option for him.

“It's terribly unfortunate that they pick a mechanism that assumes that all revenue is profitable revenue,” he added. “There are a lot of small medical device companies, and all they're doing is stacking the deck against those who are trying to be innovative new companies. They are running at a loss, and adding that cost really is not a help.”

That sentiment was echoed by ENTrigue Surgical Inc., a San Antonio-based manufacturer of ear-nose-throat surgical devices.

“Now we've got something else that's going to cut into our profit margin,” said Gabi Niederauer, vice president for research and development at ENTrigue. “Perhaps the way they could've approached it should've been based on revenues, like our income-based tax.”

Still, neither E02 Concepts nor ENTrigue plans to shelve projects. But MDMA's Benner claims that's what's happening throughout the industry because of the new tax.

“It can take anywhere from three to seven years for technology to get in the hands of a patient, and we'll never truly know what technologies have been stopped,” Benner said.

Texas ranked in the top 10 for states with the most workers in the medical-device industry, with about 66,000, according to the MDMA. The association estimates the jobs generate $3.4 billion in total personal income and $12 billion in output for the state.